I think in the context of the ongoing & worsening budget crises the chart provides a good perspective when sooner or later the MUNI topic will dominate headlines... At the latest when they need another reason to justify "QE 3.0".... ;-)
Denke die Übersicht ist besonders hilfreich wenn es wohl eher früher als später um den desaströsen Zustand der öffentlichen Haushalte in den einzelnen Bundesstaaten und Gemeinden geht ( Stichwort MUNIcipal bonds ).... Würde mich nicht überraschen wenn zukünftig die Begriffe "QE 3.0 & MUNIS" in demselben Zusammenhang genannt werden.....
US equivalents......Which countries match the GDP and population of America's states?
IT HAS long been true that California on its own would rank as one of the biggest economies of the world. These days, it would rank eighth, falling between Italy and Brazil on a nominal exchange-rate basis. But how do other American states compare with other countries? Taking the nearest equivalent country from 2009 data reveals some surprises. Who would have thought that, despite years of auto-industry hardship, the economy of Michigan is still the same size as Taiwan's?
I think the example of Illinois ( equivalent of Turkey ) & the clip with Meredith Whitney makes it cristal clear that this won´t be a minor issue down the road....
Wer noch Zweifel daran hat das der Begriff "MUNIS" in absehbarer Zeit auch in der deutschen Presse häufiger zu hören sein wird sollte sich das Beispiel Illinois ( lt. interactiver Karte auf "Augenhöhe" mit der Türkei ) vor Augen führen und das Video von Meredith Whitney ansehen... .....
To put Whitney comments into perspective i suggest to read the more balanced rebuttal from Self-Evident & Whitney Municipal-Bond Apocalypse Is Short on Default Specifics via Blommberg.... Personally i think it´s only a matter a time until a "Black Swan" arrives in the MUNI complex..... Like in Europe ( Greece & Ireland ) it will be interesting to see how the politicians will be able or willing to "balance" the pain among voters via austerity, tax hikes, cuts in entitlements etc. & bondholders via haircuts.... Either way this won´t be GDP & market positive.....
Für alle die Whitneys Aussagen für übetrieben halten bietet sich die kritische "Gegenschrift" von Self- Evident & Whitney Municipal-Bond Apocalypse Is Short on Default Specifics via Bloomberg an..... Ich persönlich bin der Meinung das es einzig und alleine eine Frage des Zeitpunkts ist, wann ( und nicht ob ) auch der MUNI Markt Besuch vom "Black Swan" bekommt..... Ähnlich wie in Europa ( Griechenland & Irland ) wird es sehr interessant zu sehen sein inwieweit die Politiker Willens & in der Lage sind die notwendigen Einschnitte zwischen den Wählern ( Kürzungen, Steuererhöhungen, drastische Einschnitte in Pensionsplänen usw )und Anleihebesitzern "auszubalancieren".... Keine der möglichen Lösungen dürfte "marktpositive" Wirkung entfallten.... In Realtime ist dies in Irland & Griechenland zu beobachten....
If 2011 is hinting at a national recovery, there is little sign of it in statehouses across the country.
States that already have raided their reserve funds, relied on borrowing or accounting gimmicks, and imposed deep cuts on schools, parks and public transit systems no longer can protect key services in the face of another round of multibillion dollar deficits.
For the week ended Wednesday, investors pulled more than $4 billion from muni funds, extending the outflow streak to ten consecutive weeks. The $4 billion pullout also represents the largest week of outflows during the run
Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.
The big loser in today’s data is the Municipal fund space which lost -$5.7 bln. This takes total outflows for January 2011 up to -$10.26 bln which is the greatest outflow since our data starts in 2007. Note that even at the height of the Lehman crisis outflows peaked at -$8.36 bln in October 2008.
The NYT reports that "President Obama is proposing to ride to the rescue of states that have borrowed billions of dollars from the federal government to continue paying unemployment benefits during the economic downturn. His plan would give the states a two-year breather before automatic tax increases would hit employers, and before states would have to start paying interest on the loans."
Michigan, for instance, owes the federal government $3.7 billion it borrowed to pay unemployment benefits. Under current law the state would be forced to pay $117 million in interest to the federal government this fall, and the federal tax on employers would automatically step up each year to repay the debt.
Empfehle zur Einführung und um das ganze Ausmaß zu erfassen vorweg China : State & Local Owned Enterprises vs Madoff, Ponzi, Enron...... zu lesen..... Letzte Woche habe ich die Überschrift bewusst noch als eine leichte Übertreibung tituliert.... War wie üblich mal wieder zu höflich.... ;-)
WUHU, China — The Anhui Salt Industry Corporation is a state-owned company that has 11,000 employees, access to government salt mines and a Communist Party boss.
Now it has swaggered into a new line of business: real estate.
The company is developing a complex of luxury high-rises here called Platinum Bay on a parcel it acquired last year by outbidding two other developers to win a local government land auction.
Anhui Salt is hardly alone among big state-owned companies. The China Railway Group is developing residential complexes in Beijing after winning the auction for a huge piece of land there.
Likewise, the China Ordnance Group, a state-led military manufacturer best known for amphibious assault weapons, paid $260 million for Beijing property where it plans to build luxury residences and retail outlets.
And in one of China’s biggest land deals yet, the state-run shipbuilder Sino Ocean paid $1.3 billion last December and March to buy two giant tracts from Beijing’s municipal government to develop residential communities.
All around the nation, giant state-owned oil, chemical, military, telecom and highway groups are bidding up prices on sprawling plots of land for big real estate projects unrelated to their core businesses.
By driving up property prices, the state-owned companies, which are ultimately controlled by the national government, are working at cross-purposes with the central government’s effort to keep China’s real estate boom from becoming a debt-driven speculative bubble — like the one that devastated Western financial markets when it burst two years ago.
Here in Wuhu, a sleepy industrial town about 70 miles west of Nanjing, Anhui Salt is breaking ground on its high-rise project in the center of town — next to a hotel operated by Anhui Conch Holdings.
The land was put up for auction in May 2009, and there were just three bidders — another of which was also a state-owned company. Anhui Salt, which also boasts of operating a steel trading arm, a financing vehicle and even two Honda dealerships, says it is eager to expand beyond industrial products and table salt.
“Platinum Bay is Anhui Salt Industry’s first luxury project and targets the very rich, the very elite class of Wuhu,” said Su Chuanbo, marketing manager.
Asked why Anhui Salt wants to be a developer, Mr. Su said the central government had encouraged state companies to be more profitable, and that real estate was incredibly lucrative.
Add the following story to the mix ........
Das kombiniert mit der nachfolgenden Meldung......
China’s July manufacturing data were the weakest in more than a year as the government clamped down on property speculation and investment in polluting and energy- intensive factories.
A purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics showed a contraction. A government-backed PMI slid to 51.2 from 52.1, the Federation of Logistics and Purchasing said yesterday.
The HSBC PMI slid to 49.4, the first reading below 50 in 16 months, from 50.4 in June. Measures of output, orders and export orders all showed contractions. The government PMI, released by the statistics bureau and the logistics federation, showed the weakest expansion in 17 months.
China's service-sector growth accelerated in July, marking the fastest pace of expansion in three months, according to HSBC's Purchasing Managers' Index. The PMI came in at 56.3 in July, up from 55.6 in June, HSBC said in an emailed statement Wednesday. "This improvement in the July service PMI reading, though modest, reflects the resilience of the domestic part of the economy, in particular consumer-related sectors. Combined with the sustained recovery in the labor market, this should cushion the economic slowdown in the coming quarters," The July PMI marks the 20th consecutive month of expansion for the services sector
This "transition" is good in the long term..... Rebalancing is needed....
Immerhin ein Silberstreif am Horizont.... Die Entwicklung des Servicesektors ist dringend notwending um die Ungleichgewichte zumindest auf Lange Sicht halbwegs ins Lot zu bringen....
We collected data on all the residential land parcel auctions in Beijing dating back to Q1 2003, and created a constant quality price index for Beijing residential land, controlling for a number of location and site quality variables that are described in Wu et al. (2010).
Figure 5 shows that real, constant quality land values increased by over 750% since 2003 in the Chinese capital, with more than half of that rise occurring over the past two years. Additional regression analysis showed that state-owned enterprises controlled by the central government played a meaningful role in this increase, as prices were 27% higher on the parcels they won at auction compared to otherwise equivalent land sites purchased by other investors.
The role of state-owned enterprises also is potentially worrisome. It could be that these entities are superior investors and are purchasing sites that are of especially high quality in ways that we cannot control for in our empirical analysis. However, it also could be that moral hazard is at work here, as these entities are thought to have access to low cost capital from state-owned banks and may believe they are too big to fail. If this is the driving force, then prices are being bid up as one arm of the government buys from another.
And once you’ve picked your eyeballs off the floor after seeing that 800 per cent figure, do note the interesting finding about the SOEs.
In particular, the paper says that a ‘meaningful fraction’ of the rise in prices was driven by the few but huge companies backed by central government — ‘central SOEs’. And central SOEs are getting more influential in the market — see chart:
And as the paper continues, by way of explanation:
…Central SOE developers pay high prices relative to the values of nearby housing unit sales prices. That suggests these particular buyers simply pay more and that this does not merely reflect omitted quality effects. Moral hazard arising from these entities believing they are too important to fail, combined with their access to low cost capital from state-owned banks, also could help explain their bidding behavior… It remains an open question as to why central SOE developers became so much more active in housing development over the past few years.
Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator
Local governments set up the financing vehicles to fund projects such as highways and airports due to limits on their ability to directly borrow money. The central government this year restricted borrowing on concern money isn’t being used for viable projects.
Only 27 percent of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded, the person said
July 27 (Bloomberg) — Credit ratings assigned to yuan- denominated bonds issued on behalf of local governments in China are misleading and don’t reflect risks investors face, Dagong Global Credit Rating Co.’s chairman said.
Local government-backed borrowers shop around for the best rankings from Chinese ratings companies and “whoever gives them a better rating gets the business,” Guan Jianzhong, chairman of privately owned Dagong, one of China’s five official ratings agencies, said in a Bloomberg Television interview in Beijing yesterday. “This is very dangerous.”
Needless to say that every large bank has China Inc. as a majority owner.....
Denke man muß nicht extra erwähnen das zudem jeder der großen Banken unter Mehrheitskontrolle des chinesischen Staates steht.....
One of the problems with a severely repressed financial system, especially one with rapid credit expansion, is that there tends to be a huge amount of capital misallocation supported by borrowing, and in an increasing number of cases it is only the artificially-reduced borrowing costs that allow these investments to remain viable. I worry that even if the PBoC wanted to raise rates, it would not be able to do so without exposing how dependent borrowers are on artificially cheap capital.
Take the most obvious example, the PBoC itself. The central bank officially has about $2.5 trillion in reserves. The PBoC has funded this position with an equivalent amount of RMB liabilities, which makes it very vulnerable to changes in the value of the currency.
Weirdly enough, although the numbers are huge, it has proven difficult to convince anyone that the PBoC is not the richest institution in the world, and that it is actually very vulnerable to big losses
The problem for the PBoC occurs not just because of the currency mismatch but also because it needs repressed funding costs to keep it profitable. How much do the PBoC foreign currency assets earn? I would guess probably between 3% and 4%, maybe less. The RMB funding cost, on the other hand, is roughly between 1.5% and 2.5%. This leaves the PBoC with a net positive carry of between 1% and 2%.
If the RMB appreciates by as little as 2% a year, in other words, the PBoC runs a negative carry on its assets. Every further 1% increase in interest rates, or additional 1% rise in the value of the RMB, then, erodes its capital by at least $25 billion (annually, if it happens through an increase in interest rates).
Many years of very low cost borrowing has created a huge dependency on low interest rates among SOEs, local governments, and other creditors of the bond markets and the banks (not to mention the banks themselves), all of whom are directly or indirectly funded by long-suffering households.
As I discussed in an entry several weeks ago, repressing the interest rate is the equivalent of granting hidden debt forgiveness
ICBC’s offer brings to more than $60 billion the amount China’s five largest banks are raising after a record $1.4 trillion in lending last year put pressure on capital levels.
Bank of China Ltd. has also said it plans a CNY60 billion rights issue in Shanghai and Hong Kong and China Construction Bank Corp. is planning a CNY75 billion rights issue in both markets
I assume the term "Drop in the bucket" fits perfectly....
Denke die Bezeichnung "Tropfen auf den heissen Stein" dürfte passen....
Frightened with Fitch on Wednesday. The rating agency has looked at where Chinese lending is disappearing to — only to reiterate that rather too much is flowing into the black hole of informal securitisation.
A very black hole, as Fitch explains (our emphasis):
Fitch believes the vast majority of these transactions are not publicly disclosed by Chinese banks, and few, if any, traces of the loans remain in financial statements. The growing popularity of this activity is increasingly distorting credit growth figures at an institutional and system level, resulting in pervasive understatement of credit growth and credit exposure. Consequently, Chinese banks’ loan loss reserves and capital are more exposed to credit losses than current data suggests.
Adjusted for informal securitisation activity, Fitch estimates that the net amount of new CNY loans extended in H110 was closer to CNY5.9trn, or 28% above the official figure of CNY4.6trn. While this difference may seem small when compared to the total stock of CNY loans for banks involved in this activity (roughly CNY34trn at end-June 2010), on a flow basis the volume of credit being shifted off balance sheets in recent times has been large and rising. Activity also is largely concentrated among just a few dozen banks, and institution-specific exposure is often much higher.
Some banks very actively engaged in transactions last year are showing up in 2010 data as minimally involved, yet the bank’s own salespeople (responding to Fitch’s enquiries) state that business remains as strong as ever. Meanwhile, private placements of products to institutional investors are becoming more commonplace, most of which are never disclosed to any entity but the CBRC.
Because of this worsening in disclosure, data from third-party providers is capturing less and less transaction flow, with as much as 40% of deals in H110 going uncaptured, versus less than 10% prior to end-2009.
Although broadly similar, informal securitisation in China differs considerably from traditional securitisations in some critical aspects: asset pools are usually very heavily concentrated; the lack of a secondary market means investors typically must hold positions until maturity; there is no tranching based on credit risk; and the roles of loan originator, product distributor, custodian, and loan manager are frequently commingled, and in practice sometimes all played by a single bank.
First, cash-rich depositors were frustrated with low [bank] deposit rates (around 2% for a one-year deposit), and trust companies were happy to offer 4% or thereabouts, principal guaranteed.
Second, even though banks’ commissions on these products are low, they did not want their clients going to other banks, so they marketed them enthusiastically. Third, in some cases the banks were able to sell their own loan assets on to the trust company, which repackaged them and then sold them as wealth management products back to the bank’s own clients. This allowed the banks to manage their official outstanding net loan position, which was subject to the loan quota.
Trust loans. These are loans extended by the trust company to one or more borrowers, which are then repackaged and sold on. We understand that quite a few real estate firms have borrowed from trusts at 15-20% annualised interest rates, given the banks’ inability (since late last year) to increase their exposure to this sector. A bank that is unable to lend to a client itself may find a trust company that is willing to lend, and then sell the asset through its own branches . .
The point is, these are sizable positions. StanChart thinks the total amount of lending done by trusts and the total value of repackaged bank loan products issued in the first five months of this year was RMB690bn ($100bn). For context, that’s about a month’s worth of Chinese bank lending.
(Other estimates are even higher. The Economic Observer has RMB2,000bn in the first half of 2010, while the Shanghai Benefit Investment Consulting thinks they were at RMB2,5000bn).
The issue then, is that even as China attempts to curb bank loans — sometimes by literally pulling the plug on them — these trusts have stepped in to fill some of the space left behind.Small wonder then, that the CBRC is so keen to crack down on the industry to make its lending restrictions effective
Despite the late 2009 orders from CBRC, "trust loans from bank-trust cooperation grew significantly in April and May," a commission official said. "Especially in May, the growth began surging. We often received text messages from banks marketing this type of wealth management product."
On June 1, CBRC convened an urgent meeting with the 12 largest of the nation's approximately 60 trust companies, asking that they slow bank cooperation. They asked that bank-trust cooperation at the end of June not exceed the level of deals posted on April 30.
Statistics from the Yanglee Trust Workshop said 504 bank-trust wealth management products were issued in June – an average 20 products per bank per day – valued at about 777 billion yuan, up 30 percent from May.
The CBRC obviously has a minor credibility issue..... ;-)
Sieht ganz so aus als wenn der Regulierer CBRC nicht ganz für voll genommen wird... ;-)
One curious absence in this legislation is the lack of any commentary regarding “debt masking” – that is, using repo transactions to reduce balance sheet at quarter-end in order to report lower leverage.
Given all the (bad) press repo has received lately, we thought there would be more explicit language in the bill regarding such activity.
ALBANY — Gov. David A. Paterson and legislative leaders have tentativelyagreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.
And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.
As word of the plan spread, some denounced it as a shell game and a blatant effort by state leaders to avoid making difficult decisions, like cutting government spending or reducing pension benefits.
Under the plan, the state and municipalities would borrow the money to reduce their pension contributions for the next three years, in exchange for higher payments over the following decade. They would begin repaying what they borrowed, with interest, in 2013.
No wonder the "In Fiat Money We Do Not Trust Camp" is getting more popular, but when considering the following headline Households Bust $1 Trillion Muni Mark it should be clear that the term "crowded" could be used for other asset classes than GOLD....;-) Thanks to the World Cup posting will be very light during the next few weeks.....
Bei solch absurden Geschichten muß man sich nicht wundern wenn das "In Fiat Money We Do Not Trust Camp" merklich an Popularität gewinnt....Und wenn man sich die nachfolgende Zahl Households Bust $1 Trillion Muni Mark ansieht sollte sich auch die angestiegende Beliebtheit von GOLD relativieren....Da momentan auch bei mir das WM Fieber grassiert wird in Sachen Blog die nächsten Wochen eher wenig passieren...
“If you were to have faxed me this balance sheet and asked me to guess who it belonged to, I would have guessed, Citadel, Magnetar or even a proprietary trading desk at a bank.” So begins a story by Alexandra Harris of the Medill Journalism school at Northwestern, which, however, does not focus on some exotic product-specialized hedge fund, or some discount window (taxpayer capital) backed prop desk (hedge fund) at a TBTF bank, but instead at the 61% underfunded, $33.7 billion Illinois Teachers Retirement System (TRS), which just happened to lose $4.4 billion in 2009 (a year when, courtesy of America's conversion from capitalism to socialism, the market rose 60%), and 5% in2008.
Yet underperformance can be explained. What can not, is that the TRS has now become a shadow AIG. As Harris notes "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps, insurance-like contracts that guarantee payment in the event of a default, that were blamed in part for the 2008 collapse of Lehman Bros. and bailout of insurance giant American International Group Inc., or AIG."
Suddenly NY pension plan isn´t looking as bad....... ;-)
Plötzlich sieht selbst die NY Pensionskasse ganz passabel aus..... ;-)
Nice addition to Gold...The Ultimate Triple-A Asset . If you are still not in the GOLD camp & "stunned" by the recent price action you really should give the link a chance..... Especially if you think GOLD is a bubble...... I think it´s more important than ever that a prudent asset allocation should at least have "some" GOLD exposure.......Doesn´t mean you have to do the "SPROTT","PAULSON" or "KAPLAN"......
Passt perfekt zu Gold...The Ultimate Triple-A Asset . Denke jeder der bisher die Preisbewegung beim Gold mit ungläubigem Staunen betrachtet sollte sich den Link zwingend zu Gemüte führen.... Gilt besonders für alle die ( oftmals seit Jahren ) im "GOLD IS A BUBBLE" Lager zu finden sind......... Ich bin mehr denn je der Meinung das jede vernünftige Portfolio Strukturierung zumindest "etwas" mit GOLD zu tun haben sollte.....Man muß ja nicht gleich den "SPROTT", "KAPLAN" oder "PAULSON" machen.....
The image from Wall Street Follies is well over 10 years old and an updated version would obviously include "QUNATITIVE EASING" aka "PRINTING MONEY"..... ;-)
Der Cartoon von Wall Street Follies ist deutlich über 10 Jahre alt..... Eine aktuelle Version würde sicher die Wörter "QUANTITIVE EASING" bzw "PRINTING PRESS" beinhalten..... ;-)
Gold has broken out to the upside even as the U.S. dollar has done likewise on the back of a renewed flight-to-safety bid. What this means, of course, is that gold has managed to hit new highs even as, (i) the U.S. dollar has risen, which means gold is breaking out against all major currencies; and, (ii) other industrial commodities, such as oil and copper, have slumped from their recent highs.
So what this all means is that gold is no longer being considered as part of a resource complex that is outperforming the segment but is increasingly being viewed as a currency of its own.
Gold is a hedge against instability of all kinds — don’t think for a second that deflation does not engender instability whether it be financial, economic or political. To be sure, gold is also a hedge against inflation — but that is going to come much, much later and will be the icing on the cake.
Totally agree on the his deflation / inflation view & timeline....
Stimme zu 100% mit der Deflations / Inflationszeitachse überein....
....the price of gold is rising against every major currency, not just the embattled euro.
Gregg Gibbs : "If the market won’t buy the government bonds, the central banks have to. There is no other choice. The alternative is just too damaging for the economy to contemplate. If the central banks don’t buy the debt, then governments are forced into a budget surplus (a surplus is required to cover interest payments on existing debt).
Imagine the carnage if major economies were forced from double digit deficits to surplus, you are talking Great Depression type scenario or worse."
Even though inflation is yet to break out, the price of gold is telling us that this threat is very real over the longer term. People rightly so do not trust fiat money anymore.
I am inclined [to warn] against the long-term implications of additional steps to turn monetary authorities (with revolving balance sheets) into fiscal agencies (with more permanent exposure to dubious assets).
An even larger-scale use of central bank balance sheets, if it were to materialize, would provide only a temporary respite, and the collateral damage and unintended consequences would be serious, including the impact on inflationary expectations.
There is little on offer in the underlying details of most governments’ deficit and debt arithmetic moreover that would suggest these debt ratios are about to peak and then decline to more manageable levels in the period ahead.
Indeed on current policy settings the evidence suggests that debt-to-GDP ratios will continue to climb.
The reasons are two-fold and relate to conventional textbook definitions of a ‘debt-trap1’
The first reason is that most governments will still be running a deficit on their cycle-adjusted primary budget balance in 2011 – the budget balance excluding interest payments that would appear if the economy was operating at full capacity.
The second reason concerns the relatively high real borrowing costs that governments are confronting at present, partly a function of low levels of inflation and – for some economies – the increasing premium that investors have been demanding to hold their sovereign debt. The ‘effective’ real borrowing rates for most OECD governments last year on their accumulated debt position was north of 3 percentage points (see charts below). For some economies it was north of 4 percentage points. Against an underlying backdrop where potential growth rates for most OECD economies are probably south of 2% and for many closer to 1.5%,this is deeply concerning.
"In order to pay the interest and the bill when it comes due, we'll simply have to issue more IOUs. That, to me, is Ponzi-like," Gross said. "It's a game that can never be finished."
A “sterilized intervention” is one where the euros created through the purchase of distressed Euro-area debt will also be absorbed by selling other assets from the ECB’s balance sheet
Therefore, we are fundamentally promising to debase the quality of our balance sheet, by exchanging higher quality Euro-area debt with lower-quality debt of countries that are ultimately likely to default.”.
Looks like even Hussman is too otimistioc when it comes to the ECB & "sterilisation"......
Beim Anblick des nächsten Links muß man leider sagen das wie zu befürcvhten war selbst Hussman beim Thema EZB und "Sterilisation" noch zu optimistisch ist....
Fixed term deposits held with the Eurosystem are eligible as collateral for the Eurosystem’s credit operations.
Which means the ECB’s govt bond purchases will be offset for a full week — until the banks can repo the fixed term deposits at things like the Long-Term Refinancing Operation (LTRO). What liquidity the ECB takes away with one hand, via the term deposits, it gives in unlimited amounts with the other.
JP Morgan’s David Mackie
In the event, there was less symbolism than we expected . . .
what the ECB is doing is potentially far more worrying. The ECB is now purchasing the government debt of sovereigns whose solvency is in question: neither the Bank of England nor the Federal Reserve did that
This is a perfect follow up on Eric Sprott Still Makes A Lot Of Sense...... ( !!! ) and shows that if you would eliminate the "Enron-Esque Accounting" probably 90% percent of all sovereign ratings are more than a little bit inflated...... UPDATE: Timing of the post could have been worse..... See end of the post.....
Die perfekte Ergänzung zu Eric Sprott Still Makes A Lot Of Sense...... ( !!! )die eindrucksvoll aufzeigt das wenn man die "Enron-Esque Bilanzierung" miteinbeziehen würde wohl knapp 90% aller Staatsratings zum Teil erheblich "inflationiert" sind..... UPDATE: Timing des Postings hätte schlechter sein können... Siehe Ende des Postings....
The rating agencies’ ranking of the United States is even more disconnected from reality. To believe that the US sets the benchmark for sovereign debt credit ratings is preposterous.
While we have written ad nauseam about the excessive debt issuance by the United States, we found a recent update written by United States Government Accountability Office (GAO) to be particularly instructive. The update noted the US’s budget deficit equivalent to 9.9% of GDP in 2009 - the largest since 1945 - and stated that without significant policy changes the US government would soon face an "unsustainable growth in debt". This was not news to us.
It goes on to state, however, that using reasonable assumptions, "roughly 93 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2020." This is news!
In less than ten years, using reasonable assumptions, there will essentially be no money left to run the US government - 93% of all tax revenues the US government collects will go to pay social security, Medicare, Medicaid and the interest costs on their national debt.
This implies no money left over for defense, homeland security, welfare, unemployment benefits, education or anything else we associate with the normal business of government. And the US government is rated AAA!?
In our view it’s time for investors to acknowledge sovereign risk. The ratings agencies can opine all they want, but it seems clear to us that the only true AAA asset to protect your wealth is gold. The risk inherent to investors, of course, is what happens when the bond market begins to realize and react to this new level of risk.
The bond vigilantes who punished governments for profligate spending in past years have gone into hiding.
Sovereign bonds yield an average 2.385 percent, about the same as a year ago and below the average of 3.08 percent in 2008 when the credit market seizure led investors to seek the safety of government debt, according to Bank of America Merrill Lynch index data.
The cost to borrow is steady even though the amount of bonds in the index that includes nations from the U.S. to Germany and Japan has grown to $17.4 trillion from $13.4 trillion two years ago.
SUPERB RISK/REWARD........ ;-) Scheint mir ein ausgewogenes Chance/Risikoprofil zu sein..... ;-)
We are trapped in some horrendous Keynesian/monetarist nightmare, where policymakers, aided/abetted/advised by their buddies in the media, in the lobbyist cabal and in financial system, have YET AGAIN decided to go down the route which merely delays the problem/pushes it down the road, but which virtually guarantees that when the NEXT bubble collapses (I assume it will be the Global Government Debt/Bond Bubble and/or the Global Fiat Money/Paper Money/FX Bubble), there is NO pleasant way back.
"In order to pay the interest and the bill when it comes due, we'll simply have to issue more IOUs. That, to me, is Ponzi-like," Gross said. "It's a game that can never be finished."
Read this twice... Bill "The Bond King" Gross from PIMCO is hinting the obvious.....Glad that i didn´t have to bring PONZI into the mix myself....... All this should make all the "GOLD BUBBLE TALK" even more "credible.... ;-)
Das letzte Zitat von Bill "The Bond King" Gross, der ja mittels PIMCO bekanntlich der weltweit größte Investor in Anleihen ist, sollte zur Sicherheit lieber zweimal gelesen lesen werden........Bin dankbar das ich PONZI nicht selber ins Spiel bringen mußte.....Dieser "grundsoliden" Fundamentaldaten geben speziell all denen die noch immer nicht genug von der "GOLDBLASE" bekommen können sicher noch mehr "Nahrung"... ;-) "GOLD BUBBLE CHART" ;-) from Todd Harrison / Minyanville via Pragmatic Capitalist
In dem Link sind noch etliche andere unangenehme Weisheiten speziell im Hinblick auf Griechenland. Empfehle daher sich die kompletten Links etwas genauer durchzulesen sowie den kostenlosen Sprott Asset Management Newsletter zu abonnieren....Kein Wunder das "vorsorglich" der IMF die Mittel zur "Stabilisierung" der Sorgenkinder mal eben still und heimlich auf 500 Mrd $ verzehnfacht hat ( kein Tipfehler )....
The "Wall Of Worry" is getting steeper...... Should the spreads remain elevated even after Greece has ""activated" the EU/IMF rescue package i think we could see the VIX spike to over 17.... ;-)
"Schockierend" .... ;-) Sollten jetzt selbst nach Aktivierung des EU/IMF Programmes die Auschläge nicht "merklich"sinken dürften mit hoher Wahrscheinlichkeit die nächste Stufe der Krise gezündet werden....
Da inzwischen weltweit die oberste Maxime selbst bei aussichtslosen Fällen "Too Small to Fail" ist dürften sich auf absehbare Zeit die Aussichten für einen "GOLD-BUG"nicht gerade verschlechtern....;-)
Empty : Though many of the properties in Kangbashi have been sold and a million people were projected to be living in Kangbashi by 2010, the city is still empty.
The central government has unleashed another round of property tightening measures. This time it is focusing on mortgage lending terms: the mortgage interest discount for first-time homebuyers has been reduced; the discount for second-time homebuyers has been abolished and the down payment requirement raised to 40%; and the rate for third-time buyers is being left to the banks' discretion with down payments raised to 60%.
Predictably, sales volumes in both primary and secondary markets have collapsed. But no one is panicking, not even those who live off the property bubble. Why? Aren't they supposed to be terrified of the government's crackdown?
It seems we have seen this movie before. China has launched property-tightening measures several times but it relaxed them just when they began to bite.
The bottom line is that local governments, and the central government through them, depend very much on property for revenue. The market doesn't believe the government will cut off the hand that feeds it.
Local governments and developers are sitting on massive liquidity that they raised last year through land and property sales and borrowings, taking advantage of the "anything goes" window during the stimulus period. They seem to believe that the central government will change its mind before they run out of liquidity. So they are comfortable waiting and not cutting prices.
Cutting prices doesn't make sense if the government is expected to loosen policy again soon. The current lending terms effectively keep second- and third-time homebuyers out of the market. To sell, developers must cut prices to levels affordable to the buyers of first homes, who have low incomes and little wealth. All the players will play by the new rules only if the central government proves its credibility by maintaining the tightening policy until local governments and developers run out of money.
Contrary to the policies' intent, local governments are readying for another round of property inflation. Local governments have been using bank loans to resettle residents, and resettlement costs have skyrocketed since those being moved need enough compensation to buy properties at today's prices. Unless property prices rise considerably, local governments will end up losing money, which they cannot afford to do.
Resettlements played an important role in supporting demand for property last year. The overwhelming majority of end-user purchases probably came from resettled residents who used their compensation money for a down payment.
Resettlement compensation is the biggest transfer of wealth from the government to the household sector since the privatization of public housing at low prices a decade ago. It is probably the most important government action supporting today's economy.
The positive elements of resettlement compensation come with two major negatives. First, it is using a form of leverage to support demand. Local governments borrow to pay the compensation packages, using the land as collateral. The resettled residents use the compensation as down payment for mortgage borrowing; so government debt becomes equity for mortgage debt.
There is no real equity in the financing chain
China's property market is a massive bubble. The stock of residential properties, developers' inventories, and land that local governments have pledged to banks may exceed by three times the gross domestic product.
Yuan appreciation hype ignores China's need for higher rates
The intensity and persistence of yuan appreciation expectations point to support for China's vast property bubble. These expectations have increased the concentration of hot money in China, which in turn has caused excess liquidity and speculation, fueling the property bubble.
By all measures (stock value to gross domestic product ratios, inventory value to GDP ratios, new property sales to GDP ratios, price to income ratios, rental yields and vacancy rates), China's property market is one of the biggest bubbles ever. It's probably much bigger than the U.S. property bubble relative to GDP.
Now, the same liquidity that fueled the property bubble is leading to a rapid pickup for consumer price inflation. One just needs to look around to see the seriousness of the inflation picture, regardless of how it's measured. Denying that inflation is serious in China right now is akin to burying one's head in the sand.This sort of denial is how countries in Southeast Asia got into a crisis situation in the past: They kept real interest rates too low and fueled speculation that eventually destroyed their banking systems.
If China's economic stimulus is withdrawn, the property bubble will cool. And it may even burst. This is why so many interest groups consistently argue against higher interest rates. Instead, they support using currency appreciation to cool inflation.
Many analysts argue that raising interest rates would attract more hot money. This is wrong. Hot money comes to China for currency appreciation and asset-bubble reasons, not to chase interest rates. When an interest rate is raised, expectations for property-price appreciation wane and hot money is more likely to fall than rise.
Increasing the yuan's value a bit would certainly trigger more frenzy. Any new property booms that follow may support the economy for a time. But the long-term consequences would be severe. Indeed, a small appreciation could make a crisis inevitable.
As always superb "Anti Spin" from Hussman.....Long read but with all markets at new highs & on a global scale well over 1 trillion in taxpayer money for the still ongoing bailouts , QE, ZIPR etc it is more important than ever to ask what happened to "the toxic assets" ..... Hussman focusses mainly on US mortgages but i think it is safe to say that similar things are true globally when it comes to CRE, corporate loans etc... Fits nicely to Fridays post "Surprise, Surprise....." Big Banks Mask Risk Levels - Quarter-End Loan Figures Sit 42% Below Peak .....I have to repeat myself when it comes to the ÜBERBULLISH Cramer´s Bull Case For Banks
"Would at least be honest if he mentioned the "ultimate moral hazard trade" & the "Enron-esque characteristics" when it comes to accounting as the two main reasons behind the motives to own banks.. ;-)"
Dringend benötigter "Anti Spin" vom gewohnt erstklassigen John Hussman....Recht ausführliche aber im Angesicht der neuen Markthochs aber unbedingt lesenswerte Ausführungen wenn es um das von einigen bereits als "gelöst" bzw. verdrängt geltende Problem der "Toxic Assets" geht....Schon erstaunlich ( einige würden auch sagen schockierend...) was weltweit gesehen wohl locker über 1 Billion an Steuergeldern die noch immer weiter fliessen ( siehe "The Rolling Bailout Bus" ) , QE, ZIRP usw bisher beim Kernproblem der Krise bewirkt haben.....Obwohl Hussman hier in erster Linie Hypotheken abhandelt ist es sicher keine Übertreibung zu behaupten das weltweit ähnliches auch für gewerbliche genutzte Immobilien sowie Firmenkredite gilt....Wie gemacht als perfekte Ergänzung zum letzten Posting "Surprise, Surprise....." Big Banks Mask Risk Levels - Quarter-End Loan Figures Sit 42% Below Peak ......Muß mich leider erneut wiederholen wenn es um zunehmend bullische Bankempfehlungen ( für ein besonders krasses Beispiel siehe Cramer´s Bull Case For Banks ) und damit indirekt auch für den Gesamtmarkt geht.....
"Wäre zumindest ehrlich gewesen wenn er in seinen 10 Gründen die unbedingt dafür sprechen sofort massiv Bankaktien zu kaufen den "ultimativen Moral Hazard Trade" sowie die kreative Bilanzierung die stark "Enron-esque characteristics" aufweist als die Topgründe aufführen würde.... ;-)"
With regard to credit conditions, the U.S. financial system continues to pursue a strategy of "extend and pretend." A year ago, the Financial Accounting Standards Board (FASB) suspended rule 157, which had previously required banks to mark their assets to market value when preparing balance sheet reports. The basic argument was that fair values were not appropriate because there was "no market" for troubled assets. Certainly, the FASB could have implemented something at least modestly reasonable, such as 2-year or 3-year averaging, but instead, they changed the rules to allow "substantial discretion" in the valuation of bank assets in their financial reports.
To a large degree, the idea that there was "no market" for troubled assets was false even at the time. Last year, Dean Baker of the well-regarded Center for Economic Policy Research (CEPR) testified before Congress, observing "There has been considerable confusion about the nature of the troubled assets held by the banks. While banks do hold some amount of mortgage-backed securities, these securities are in fact a relatively small portion of their troubled assets. The troubled assets on the banks' books are overwhelmingly mortgages, both first and second or other junior liens, not mortgage-backed securities. The FDIC has acquired large quantities of mortgages from its takeover of several dozen failed banks over the last year. It auctions these assets off on an ongoing basis. The results of these auctions are available on the FDIC website. Non-performing mortgages typically sell in these auctions at prices in the vicinity of 30 cents on the dollar."
He continued, "It is not clear on what basis these auctions can be said not to constitute a market. While the downturn and the constricted credit conditions affect the market, it is simply inaccurate to claim that there is no market for these assets. The major banks are undoubtedly not pleased at the prospect of having to sell off their loans at these prices, but this merely indicates that they are unhappy with the market outcome, just as a homeowner might be unwilling to sell her house at a loss. However, the unhappiness of the seller does not mean that there is no market."
The impact of "extend and pretend" is to create a gap between the reported value of assets and the value they would have on the basis of the cash flows that those assets can reasonably be expected to generate over their maturity. In order to avoid having to restate assets, banks have allowed an increasing gap to develop between the volume of delinquent loans and the volume of loans actually in foreclosure, creating a growing "shadow inventory" of impaired but unmodified and unforeclosed loans.
Moreover, regulatory changes over the past year have affected what actually gets reported as "troubled." As the New York Times recently observed, " A bank owed, say, $4 million on a property now worth $3 million would previously have had to classify the entire loan as troubled. Now it can do that to the $1 million difference only." In effect, even though impaired loans tend to sell at only 30-50 cents on the dollar (reflecting a modest haircut to the amount typically received in foreclosure), banks can choose the amount of assets it reports as troubled simply by choosing what value to assign the property while it holds the bad loan on its books.
While it's interesting that credit card delinquencies have eased off modestly in recent months, this is not necessarily a healthy sign. Even in the third quarter of 2009, TransUnion reported that consumers delinquent on their mortgages but current on their credit cards increased by 6.6%. In effect, people have been choosing to pay their credit cards in priority to their mortgages.
As for policy efforts to reduce delinquencies, I've long argued that it is a bad idea for policy makers to announce delinquency prevention plans that have, as their centerpiece, publicly subsidized reductions in mortgage principal. It's one thing to extend the loan in a way that preserves its present value, by swapping a claim on future appreciation in return for principal reduction, but it's quite another to offer to cut the principal outright. The reason ist that instead of confining the assistance to presently troubled borrowers, you create a whole new set of borrowers who then choose to be troubled in order to get the assistance. According to a University of Chicago study, "strategic defaults" - where people choose to default on their mortgages even though they can afford to pay - accounted for 35% of all residential defaults in December 2009, up from 23% in March 2009. Offering public subsidies for this behavior, when too many homeowners are already legitimately struggling, does not smack of a bright idea.
The New York Times recently provided a good picture of how the delinquency situation stood at the end of 2009 (based on FDIC data):
In short, my impression is that investors are deluding themselves about the solvency of the banking system. People learned in the 1930's that when you don't require the reported value of assets to have a clear and tangible link to the value that the assets would have in liquidation, bad things happen. Yet this is what regulatory and accounting rules are allowing for the banking system at present. While I do believe that bank depositors are safe to the extent of FDIC guarantees, my impression is that the banking system is still quietly insolvent.
Will it work? Will it change?
Regardless of whether the U.S. banking system would not presently be able to meet its liabilities with its assets, there is another question: assuming that banks are allowed to extend and pretend for a long enough period of time, will they ultimately be able to accumulate enough retained earnings in the years ahead to cover eventual loan losses? In other words, is it possible that everything will be OK if we just look the other way long enough?
From my perspective, it depends on what "OK" means. Simply in terms of long-term solvency - assets being ultimately able to meet liabilities - my impression is that yes, given enough time, retained bank earnings should cover the losses on existing loans. Indeed, it's possible that banks might be able to report fairly healthy "operating earnings" to investors, and then somewhat more quietly write off losses as "extraordinary" charges over a period of years. This type of outcome is beginning to look possible, because investors evidently don't mind repeatedly having their pockets picked as long as "operating earnings" come in above analyst estimates.
Unfortunately, in that sort of world, the economy would likely be hobbled for a long period of time, as Japan has discovered over the past couple of decades. With banks focused primarily on survival and recapitalization, retained earnings would be directed to making the existing liabilities whole, rather than contributing to productive new investment.
So to the extent that "extend and pretend" is successful in averting insolvency concerns, it will also tend to weigh down lending activity, as resources are allocated toward servicing existing debt burdens on bad assets, rather than toward new lending for productive activity. The most efficient outcome is always for lenders who provide capital to take losses if the loans go bad. That sort of market discipline is the only way to ensure that capital gets allocated properly. This is not the world that we have lived in over the past year, as policy makers have pledged public money to make private bank bondholders whole, regardless of how irresponsibly the banks allocated the money. But it is important to recognize that this policy comes with longer term costs.
Needless to say that i think he is spot on....... It will be interesting to see how Mr. Market will react to the quality of ( bank ) earnings / balance sheets during the reporting season.....This could be at least a possible trigger to calm down the "somewhat elevated" risk appetite significantly.....
Überflüssig zu erwähnen das ich zu 100% übereinstimme..... Es wird spannend zu beobachten inwieweit in der jetzt startenden Berichtssaison die Gewinn und Bilanzqualität der Banken hinterfragt wird.... Sehe hier durchaus erhebliches Potential den "leicht erhöhten" Risikoappetit doch merklich zu zügeln.....
April 12 (Bloomberg) -- Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. may have to set aside an additional $30 billion to cover possible losses on home-equity loans, an amount almost equal to analysts’ estimates of profit at the three banks this year.
I happen to agree with John Hussman on all points mentioned. Moreover, it is not just the U.S. banking system that is insolvent, the global banking system is nothing but a giant extend and pretend operation including the PIIGS (Portugal, Ireland, Italy, Greece, Spain), China, the UK, and even Canada as soon Canada's gigantic housing bubble crashes.
The issue is that in order for banks to include DTAs in their Tier 1 capital, they need to be able to show regulators that they will generate enough income in the future to actually use them.
Citigroup, for instance, has been racking up enough losses in recent years to generate $47bn worth of DTAs at the end of 2009, about $21bn of which was included in their Tier 1 capital that year. So that’s $21bn coming out of years of losses, but based on the premise that the bank will soon be profitable.
They will find a "creative" way to reassure their future profibility..... The Treasury wants to sell a 7.7 billion shares within the next year... ;-)
Bin mir sicher das hier ein kreativer Weg gefunden wird um die zukünftige Profitabilität zu gewährleisten...Immerhin will das Finanzministerium noch 7,7 Mrd Aktien binnen 12 Monaten auf den Markt schmeissen ;-)
Even now, a year and a half after Lehman’s collapse, major banks still undertake such transactions with businesses whose names, like Hudson Castle’s, are rarely mentioned outside of footnotes in financial statements, if at all.
Most of the arguments could be made only by banks who have been drinking their own kool-aid for so long that they no longer have any idea what sounds ridiculous and what doesn’t.
